Lantheus Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Unless noted otherwise, amounts are USD millions. Lantheus develops, manufactures and commercializes diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $82.6 | $81.4 |
| Gross profit / margin | $42.3 / 51.2% | $39.8 / 48.9% |
| Operating income / margin | $15.1 / 18.3% | $11.9 / 14.7% |
| Net income | $8.2 | $4.1 |
| Diluted earnings per share | $0.21 | $0.11 |
| Operating cash flow | $(0.7) | $5.5 |
| Capital expenditures | $2.1 | $4.9 |
Cash and cash equivalents were $73.7 at March 31, 2018, down from $76.3 at year-end 2017. Current assets were $159.3 and current liabilities $45.4. Long-term debt was $267.7 on the balance sheet, including the current portion; principal outstanding was $272.3. The $75 revolving facility had no borrowings outstanding. The term loan carried a 5.6% interest rate and matures June 30, 2022.
Operating cash use reflected working-capital outflows, including higher receivables and inventory and payment of prior-year bonuses. Financing cash use was $0.7, principally scheduled debt repayments and tax withholding on equity awards. Investing cash use was $1.1, after $2.1 of capital spending offset by $1.0 from a land sale.
Material changes versus Q1 2017
- Revenue increased 1.6%. DEFINITY revenue rose 18.4% overall, to $44.7, supported by higher volumes. TechneLite revenue fell 20.2%, to $21.4, primarily from a temporary supplier disruption; Xenon revenue was $7.9 versus $8.1.
- Gross profit increased 6.4%, with gross margin up about 2.3 percentage points. Operating income rose 26.9%, reflecting higher DEFINITY contribution, lower research and development costs and lower depreciation.
- Interest expense declined $1.4 to $4.1 following the 2017 refinancing and repricing. Q1 2017 included a $2.2 debt-extinguishment loss; Q1 2018 did not.
- Income tax expense rose to $3.8 from $0.8; the effective tax rate was 31.6% versus 15.9%. Management attributed the change principally to profits in the period and the prior-year release of the domestic deferred-tax valuation allowance.
- Operating cash flow shifted from $5.5 provided to $0.7 used, despite higher net income, mainly because of working-capital movements.
Outlook, management commentary and risks
- Management said existing cash, operating results and borrowing availability were expected to fund liquidity needs for the foreseeable future. The filing provides no formal quantitative revenue or earnings guidance.
- Management described DEFINITY as its fastest-growing, highest-margin commercial product and planned additional clinical trials in the second half of 2018 to pursue an ejection-fraction indication. It anticipated entering a Phase 3 trial for LMI 1195 by year-end 2018. These plans and outcomes are uncertain.
- Supply concentration is a key risk: JHS was the sole-source manufacturer of DEFINITY, Neurolite, Cardiolite and TechneLite evacuation vials. The NTP processing facility was offline from late November 2017 to mid-February 2018, limiting TechneLite supply and reducing sales and cash flow. The company was pursuing supplier diversification and additional manufacturing capacity, without assurance of success.
- Other stated risks include DEFINITY competition and potential generic competition following patent or regulatory exclusivity expirations; Xenon competition; dependence on major customers and third-party manufacturers; fragile global molybdenum-99 supply; reimbursement, regulatory, product-liability and development risks; and substantial debt and covenant constraints.
- The company was in arbitration with Pharmalucence over a DEFINITY manufacturing and supply agreement and was seeking monetary damages. It said the outcome and any recovery could not be predicted. No other material ongoing litigation or regulatory proceedings were reported.
- The $28.2 surety bond supporting decommissioning assurance for the North Billerica facility relates to an estimated asset-retirement obligation of approximately $26.9; the recorded balance-sheet liability was $10.7.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; management said adoption had no material financial-statement impact. There were no material changes to reported risk factors.
Important facts for investors to verify
- Whether DEFINITY growth can continue and how competition or patent and exclusivity expirations may affect sales and margins.
- Whether TechneLite supply has recovered following the NTP disruption, and whether alternate suppliers and manufacturing programs progress as planned.
- Receivables, inventory and other working-capital trends, given the Q1 operating cash outflow despite higher earnings.
- Debt service, leverage-covenant headroom and the practical availability of the undrawn revolver.
- Progress and funding needs for the planned DEFINITY and LMI 1195 clinical programs, and the status and potential outcome of the Pharmalucence arbitration.